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The New York Times has a long article in the Sunday business section (here) detailing the alleged fraud involving KL Group, which operated out of southern California and West Palm Beach. The firm touted its outsized, and apparently overblown, returns on its investments, asserting it had a 70% return in 2003 and a 40% return in 2004, and gathered approximately $200 million in assets from investors, most of which is long gone. According to the Times, the firm's entree into the Palm Beach set came through a local trust and estate attorney, Ronald Kochman, who invited his clients to invest and later became a principal of the firm. Its collapse finally came in March 2005 when investigators from the SEC appeared at the firm's offices and demanded documents; a few days later, the Commission filed for and received an emergency freeze order on its assets after it discovered the fraud, although only about $11 was in its accounts (see Litigation Release here).

Kochman will face some difficult issues explaining his role in the firm to his clients, especially if he did not explain completely his conflict position in recommending to clients that they invest in a company in which he had a financial interest. That type of conduct tends to get the bar authorities interested, to say nothing of the malpractice and breach of fiduciary duty claims. His conduct perhaps may even peak the interest of the SEC and the U.S. Attorney's Office regarding the exact nature of his involvement in KL Group (he joined the firm after its formation), and whether he misled his law firm clients to entice their investments. Hedge funds are lightly regulated, with only minimal disclosure duties compared to more common investment vehicles, and some are wildly successful. But the lure of easy money and minimal oversight also makes the field one that is attractive to scam artists, such as the founders of KL Group described in the Times article, to ply their trade. (ph)